CFRP’s Comments on Module 2 of the DZO

The second module (“Module 2”) of the Draft Zoning Ordinance deals primarily with the affordable housing bonuses and inclusionary zoning piece of the new ordinance. Below, we provide some commentary on the module, focusing on areas where we think it could use some changes in order to better support affordability and to mitigate adverse impacts.

First, we think the city needs to be more thoughtful about the metric it uses to define “affordability.”  It is understandable that policymakers who have to grapple with the many perplexities of land use and planning rely on government-written benchmarks in the rare case they exist, but a “percentage of AMI” threshold will not ensure that affordable units remain affordable for the long term.  AMI is tied to median income; median income does not depend only on the wage increases received by existing city residents, but also on changes to the composition of the workforce and population.  Housing prices and wages are both endogenous to the economic development model.  If Charlottesville undergoes gentrification, that entails a change in the population composition that leads to both higher wages and higher housing prices.   In a jurisdiction under gentrification pressure, a “percentage of AMI” standard will tend to leave behind long-time residents, since wage settlements show slower increases than median income.  The latter grows based on compositional changes while the former does not.  While it may be appropriate to set the initial affordability thresholds based on an AMI standard (though it should be noted that for most apartment sizes, the 60% of AMI threshold will spit out rents *above* the HUD Fair Market Rent for our area and within 5-10% of ApartmentList’s median rent numbers), we would suggest that annual adjustments should be tied to CPI-U or a BLS metric of wages for set wage categories.

Second, with respect to bonuses the city should consider why the Steering Committee did not endorse the Housing Advisory Committee’s plan (i.e. very high allowed density anywhere in the city, but only for fully affordable projects) back when the FLUM was being prepared.  A doubling of density implies projects that are both out of scale with surrounding neighborhoods and likely to require infrastructure improvements.  At the same time as these projects, composed of 100% affordable units and likely built by non-profits, will not be net contributors to the fisc, leaving the infrastructure costs to the city.  With that in mind, It makes no sense to let these sorts of high-density projects pop up randomly rather than to channel them such that infrastructural economies can be achieved.  At the same time, the requirement of 100% affordability means that only LIHTC projects would ever qualify anyway, and very few LIHTC developers will get involved with even a 16-unit project.  It is simply too small.   The city should consider a smaller bonus for something more like 50% affordability, or scrap the bonus program entirely.

Third, during the FLUM debate, some brief discussion was given over to the question of how liberalized subdivision rules might work at cross-purposes with inclusionary zoning.   If inclusionary zoning requirements only kick in at 10 units, developers will surely look to do postage-stamp subdivision in order to do a large (in units) project without crossing 10 units on any one parcel.  Obviously, that won’t work for highrises, but if the idea is to have affordable units in infill developments, the city needs to plug this loophole.  We would suggest changing the rules such that any project that crosses 10 units on a parcel or combination of parcels that were a single parcel as of 2022 will trip the IZ requirement.  In addition, the claim that the city can demand no more than a 10% requirement on 10+ unit projects belies the narrative of highly restrictive zoning.  If our zoning were truly a binding production constraint  that massively drives up prices, then the right to build a 10+ unit building where one would today only be able to build one or two units should be worth much more than the cost of providing 10% affordable units.  Even Albemarle has proposed a 20% requirement.  Cities with truly expensive housing ask for up to 30% in some cases, with much more aggressive affordability thresholds.   The city should either rethink this whole effort or actually ask for a fair share of the value being created by looser zoning to find its way to affordable housing.

We now address a few points that are not  in Module 2, but which relate to affordable housing.  First, the city needs to recognize the financial power of the student housing model.  On a quality-adjusted per square-foot basis, no residential use generates rents as high as those we see in student housing, particularly newbuild luxury student housing.   If there is any use that the current zoning might restrain, it is student housing, and that was the intent of the drafters of the current zoning (the 1991 downzoning under Mayor Edwards specifically aimed to prevent the encroachment of student housing on family and low-income neighborhoods).  We will not improve affordability if the new zoning simply leads to a rapid conversion of family neighborhoods to student housing zones, unless we get a commitment from UVA not to increase enrollment.  It is worth noting that UVA just tore down University Gardens and has no plans to build new housing where those circa 100 units once stood.  We should not allow the DZO turn into a writ for UVA to externalize housing burdens to the community.  The city should consider making “per-bedroom” rental a separate use from simple residential occupancy and restrict this use only to areas that are currently heavily student-oriented.  Align the eligibility requirements for affordable units with HUD’s LIHTC rules: full-time students are not eligible for supported affordable units.

Second, we should not let the DZO open the door to yet more Airbnb pseudo-hotels.  Homestay should not be a permitted use for any R-A/B/C zone.  Or at the very most, it should be an allowed use for only one unit per parcel.  Let’s commit resources to the enforcement of the Airbnb rules.  If the capacity to do so does not exist within the city workforce, we should consider using one of the many contractors that do “Airbnb detection” for other cities (check out Granicus and Host Compliance).

Third, we must consider including level-of-service standards as part of the DZO, so that site-plan approval depends on a simple, formulaic calculation of the infrastructure impacts, if any, of developments above 4 units.  If a development will lead to a breach of the standards, the developer will pay an impact fee.  Many municipalities, including in Virginia, have level of service standards. Taxes represent part of housing costs, and a growth strategy that leads to the production of luxury housing the infrastructural impacts of which are covered by higher taxes on everyone, including homeowners with lower incomes than the folks occupying the new housing, militates against the goal of affordability. To further tilt the playing field toward affordable housing and away from luxury housing, the impact fees should be waived for any affordable units.

Finally, students of housing economics, whether they are upzoning optimists or pessimists, all concur that housing prices respond most swiftly and fully to an increase in high-wage and high-wealth residents.  Demand shocks can be much more abrupt and large than any realistic supply response, regardless of land use regulation.  It was therefore quite surprising to us to read Jim Freas’s comments in the Cavalier Daily this spring.  Of the DZO, he says, “Hopefully it will make the City an attractive place for students to then decide to stay and build their careers here and live in the City.”  If you narrowly consider the question of housing affordability, the very last phenomenon you should encourage is the addition to the housing market of hundreds or thousands of high-earning, childless and generally financially unencumbered UVA grads.  The direct effect will sharply boost housing prices as high-paid folks who can easily pay a higher fraction of income on rent because of their stage of life outbid families headed by breadwinners without elite educational credentials; the indirect effect of their consumption of services will provide an additional filip by bringing more low-wage service workers into the market.  If our planning guru doesn’t understand that, it’s a worrisome sign.  But it would prove more disturbing if it turns out he does understand it but feels like it is OK to build support for the DZO by pandering to students.

May 2023